IP: Trademark disputes as an unintended consequence of distribution agreements

For an unwary manufacturer, entering into a distribution agreement can result in the loss of rights in its own trademarks. Under some circumstances, a distributor can acquire ownership of trademarks in goods it did not manufacture, even if the manufacturer believes it owns the rights.

This situation arises when the parties’ distribution agreement does not address trademark rights.

Typically, when a manufacturer owns a trademark and enters into a distribution relationship, the distributor does not acquire trademark rights. Similarly, when a distributor buys goods from a manufacturer and applies its own trademarks, it owns them. When disputes arise, the key issue is which party initially owned the mark.

A contractual provision is usually determinative if a contract between the manufacturer and distributor addresses trademark rights. In the absence of such an agreement, courts and the Trademark Board presume the manufacturer owns the mark. But the presumption can be rebutted.

When can a manufacturer lose trademark rights?

When a dispute arises, a court will look to various factors to determine whether the distributor has overcome the presumption that the mark belongs to the manufacturer. These factors, in effect, allow the court to decide which party the public would identify with the product.

This situation can come up whether or not the trademark existed before the parties’ distribution agreement. In some cases, the mark did not exist at the time of the agreement, but one or both parties began to use it during their relationship. In others, the mark predates the agreement and the distributor obtains federal registration for the mark, while the manufacturer claims common law trademark rights or seeks to cancel the distributor’s registration. Or the parties may simultaneously seek registration of the trademark after their distribution agreement expires.

How does a distributor rebut the manufacturer’s presumption of ownership?

A court will only disturb the presumption that the manufacturer owns the trademark if the balance of factors indicates the mark should belong to the distributor. Those factors can include:

Federal registration of the mark

Which party invented the mark

Which party first affixed the mark to the product

Which party’s name appeared on the product with the mark

Which party maintained the quality and uniformity of the product

Which party the public identified with the product

Which party was responsible for advertising and promoting the product

Some jurisdictions are more willing than others to use these factors in determining which party has rights to a trademark. The 7th Circuit and 3rd Circuit will not use the factors to divest a party of ownership of the trademark, once initial ownership has been established. On the other hand, the Northern District of California has emphasized that an exclusive distributor can acquire trademark rights superior to those of the manufacturer.

How is the trademark problem resolved?

Typically, the court will decide that the trademark belongs to one of the parties, and the losing party must stop using the mark. However, that is not always the result.

The 8th Circuit came to a compromise solution in Wrist-Rocket Manufacturing Co. v. Saunders Archery Co. In that case, an inventor entered into a distribution agreement with Saunders Archery Co., which was continued by the inventor’s successor, Wrist-Rocket Manufacturing Co. The agreement was silent with regard to the trademark “Wrist Rocket,” which was created during the parties’ business relationship.

After Saunders Archery and Wrist-Rocket’s relationship ended, each party manufactured and marketed products under the “Wrist Rocket” label. Wrist-Rocket argued that Saunders Archery’s actions to promote the product inured to Wrist-Rocket’s benefit because their relationship was that of manufacturer and exclusive distributor. Saunders Archery contended that their agreement was merely a buy-sell arrangement.

The 8th Circuit held that Saunders Archery had a common law right to the trademark. The distributor was the first to use the trademark and the party the public identified the product with; during most of the parties’ relationship, the mark appeared without any mention of the inventor, and the distributor attempted to control the quality and appearance of the product.

However, the district court had erred in canceling Wrist-Rocket’s federal trademark registration. The 8th Circuit explained that Saunders Archery’s common law right to use the mark should not destroy the incontestable status of Wrist-Rocket’s mark. Both parties were entitled to use the trademark in connection with their products, in conjunction with a prefix to identify the source.

Manufacturers can protect themselves by addressing intellectual property rights in distribution agreements and using their trademarks in connection with their names and products. If a manufacturer ensures its name appears on the product next to the trademark, that it controls the quality of the product and handles customer complaints, or that it takes responsibility for advertising and marketing, it stands a better chance of keeping its trademarks.